Nov 18, 2017

Why Amazon Just Spent a Fortune To Turn 'Lord of the Rings' Into TV

One ring to rule them all, including Game of Thrones...JL

Derek Thompson reports in The Atlantic:

Jeff Bezos has insisted that the company focus on securing a hit show on par with HBO’s Game of Thrones. With Lord of the Rings, he secures the rights to an even more popular epic fantasy—just as HBO’s juggernaut is set to end its run. In a crowded media environment, audiences reliably gravitate to stories that they know. 80% of viewing time on subscription video is spent watching “back catalog” content. Blockbuster economics: overkill is underrated.

Amazon has acquired the television rights to J.R.R. Tolkien’s fantasy series TheLord of the Rings. With this deal, which industry publications estimate at being worth $250 million, Amazon can use the classic Middle-earth mythology as a canvas for several different TV shows, including backstories of beloved characters like Aragorn.

The gargantuan deal is perhaps the most important event in the history of Amazon’s television business. It carries major implications for the streaming wars with Netflix, Hulu, and (soon) Disney, as well as critical lessons for business strategy in an age of content abundance.

First, the deal signals an abrupt turn for Amazon. Five years ago, the company announced that it was getting into the movie and TV business. But rather than transform the entertainment industry the way it has ransacked e-commerce, Amazon has remained a sideline player, despite spending more than $4 billion a year on content. Rather than home runs, like Game of Thrones and Stranger Things, the company’s slate is full of minor hits, like Transparent, and a lot of outs. Complicating matters, in October, the company’s head of film and television, Roy Price, quit amid several allegations of sexual harassment.

In recent months, Amazon CEO Jeff Bezos has insisted that the company focus on securing a hit show on par with HBO’s Game of Thrones. With this Lord of the Rings deal, he secures the rights to an even more popular epic fantasy—just as HBO’s juggernaut is set to end its run.

The upfront costs of $200 million to $250 million seem staggering. Those figures don’t include a production budget, which could be more than $150 million per season, or tens of millions of dollars in potential marketing costs. All told, Amazon could wind up paying half a billion dollars before anybody sees one minute of content. According toDeadline, industry sources have called the deal “insane,” given the size of the up-front commitment and the fact that there are already six installment (and 15 hours) of Peter Jackson’s trilogies of The Hobbit and The Lord of the Rings.

But perhaps it’s precisely the existence and proven success of those films that justifies Amazon’s extraordinary deal. Jackson’s six Middle-earth films have a combined global box office of about $6 billion. Game of Thrones, its thematic descendant despite being adapted from the books by another author, George R. R. Martin, is the biggest hit in HBO history.

One might think that six Tolkien films and seven Game of Thrones seasons is fantasy overkill. But the single most important media-industry lesson of the 21st century might be this: Overkill is underrated. Consider Disney’s endless Marvel franchise, which is now on its 17th(!) film. The franchise has earned $13.3 billion for the company and shows few signs of slowing down, relative to the competition. Two of the franchise’s most recent installments, Guardians of the Galaxy Vol. 2 and Thor: Ragnarok, are respectively the second and fourth biggest opening weekends of 2017.

There are several takeaways here. The most fundamental is that in a crowded media environment, audiences reliably gravitate to stories that they know, not hours of content with no recognizable hook, which might turn out to be a total waste of time. Indeed, despite the fact that Netflix, Amazon, and Hulu are spending billions of dollars a year on original shows, 80 percent of the viewing time on subscription video sites is spent watching “back catalog” content, including reruns and movies that have left theaters.

Due to this preference for familiar storytelling, it’s difficult for media companies to use a “Moneyball” strategy for entertainment content. Moneyball, for the uninitiated, refers to a strategy of using advanced analytics to spot underappreciated talent. In a sport like baseball, it often works by identifying middling players who are secret stars, whose star-making skills are unfamiliar to most scouts. But in media, where unfamiliarity itself is the enemy, the most valuable franchises—or, in industry speak, “intellectual properties”—are often, almost by definition, those that are already well-known to audiences.

For years, Amazon seemed to employ a Moneyball approach to media, spreading its bets across less-than-stellar intellectual properties. But now even Amazon, that wrecking ball of corporate axioms, seems to be learning the value of blockbuster economics: It is sometimes wiser to spend a gazillion dollars on a known franchise than to play coy with a million little bets.

That might seem like a blunt strategy, the opposite of sophistication, or Moneyball craftiness. But as Harvard Business School professor Anita Elberse argued in her influential book, Blockbusters, assuming a given budget, it is often more profitable for a company to spend a large percentage on one guaranteed hit than to play Media Moneyball, hoping that a dozen small-budget bets yield as least one profitable hit.

Why does blockbuster economics work? The reason was once articulated quite brilliantly by Bezos himself, in his 2016 letter to shareholders that, fittingly, compared his industry to baseball:

The difference between baseball and business ... is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.

The benefits of entertainment hits cannot be captured by ratings or ticket sales alone. Hits have spillover effects. Disney’s purchases of Marvel and Lucasfilm have been merchandised with sequels upon sequels, valuable toys and merchandise, and amusement park rides. In entertainment, a hit scores a thousand runs.

So, that’s why a retail company is about to spend half a billion dollars on one television franchise. In 1999, The Lord of the Rings trilogy was named Amazon customers' favorite book of the millennium. That level of familiarity and adoration makes a television series resonant, not redundant. Amazon is a global service looking for globally relevant content for a global audience. If its Middle-earth series becomes must-see TV around the world, it would mean millions of new devoted subscribers in the Amazon Prime fellowship, collectively paying billions of dollars, lured by a fleet of dwarves, elves, and hobbits that would, one might say, rule their shopping behaviors and bind them to one supranational force. That would be more than a homer. That would be the hit that scores a thousand runs.

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As a Partner and Co-Founder of Predictiv and PredictivAsia, Jon specializes in management performance and organizational effectiveness for both domestic and international clients. He is an editor and author whose works include Invisible Advantage: How Intangilbles are Driving Business Performance.Learn more...